The intersection of traditional finance and the crypto market has once again been brought to the fore when two of the most crypto-friendly banks and the largest bank favored by tech startups collapsed within a week. This prompted the federal government to step in and provide a boost to depositors in these banks. As cryptocurrency prices rose in response, the stability of the banking sector began to be questioned. So what caused all this? Let’s dig deeper and understand exactly what happened. Let’s also examine how this could start a very long bull run for the crypto markets.
The collapse of two crypto-friendly banks: Here’s what happened
Silvergate Capital, a centralized lending platform in the crypto industry, has announced that it will cease operations and go into liquidation. Silicon Valley Bank (SVB), which plays a similar role in managing money for venture capital-funded startups, said it needs to raise $2.25 billion to support its balance sheet. After that, depositors withdrew over $42 billion. State regulators eventually closed the bank. Signature, another crypto-focused bank larger than Silvergate, has been seized by regulators.
Both Silvergate and Signature were two of the leading banks for crypto companies. Almost half of venture-backed startups in the US kept their funds in Silicon Valley Bank. Broadly speaking, all these banks faced the same problem: classic bank run-offs. Bank collapses are a type of financial panic that occurs when large numbers of depositors withdraw their money from a bank due to concerns about the bank’s solvency. In other words, these banks had to sell their support assets in exchange for a significant loss when their cash demands increased.
The instability of traditional finance means a rally for cryptocurrencies
In the US, state regulators closed Signature Bank, with roughly 30 percent of its deposits coming from crypto clients, while Bitcoin fell below $20,000 and ETH traded at $1,400. Later that day, however, the federal government secured all deposits for the SVB and Signature depositors. This created confidence in the crypto market and started a rally, increasing Bitcoin and Ethereum prices by 15 percent and 10 percent, respectively. Currently, Bitcoin is trading above $29,500. During the bank rush, it had its best performing week since October 2019.
However, the closure of three banks could spell trouble for Bitcoin in the long run. Silvergate and Signature were platforms that allowed crypto clients to make payments 24 hours a day, seven days a week. Their collapse could affect Bitcoin and crypto liquidity in general, as they support a significant portion of fiat payments for Bitcoin transactions. The good news is that new banks have already stepped in, in short, the “red flags” have already fallen.
Stablecoins are not very stable
Last year, many problems in the crypto industry stemmed from the collapse of stablecoin Terra USD (UST) in May. Meanwhile, New York regulators and the SEC seem to be going after BUSD, Binance’s dollar-pegged stablecoin. With confidence in this industry already low, Circle, behind the USDC stablecoin, tweeted that it has $3.3 billion in funding at SVB. While Circle has long been seen as one of the safest stablecoin companies with its connections and support from traditional finance, it wasn’t too safe from investor fear.
As a result, USDC lost its $1 stable and fell below 86 cents at one point in the past month. Similarly, DAI, another popular dollar-pegged stablecoin backed in part using USDC, has dropped as low as 90 cents. However, it is important to note that USDC is doing everything by the book, and naturally, the main reason for the decline was the banking sector.
Many crypto investors have started exchanging their USDC and DAI for Tether USD (USDT), the largest stablecoin with a market cap of $72 billion. While the company behind USDT has not transferred funds to the SVB, its business practices and reserve status are questionable. Regardless, USDT traded above the $1 stable as traders panicked looking for a safe-haven. The stablecoin market has gradually recovered, with Circle CEO Jeremy Allaire updating on the situation, saying all deposits from the SVB are safe. Hence, both DAI and USDC have bounced back towards the dollar stable.
Conclusion: Cryptos and traditional finance are connecting
All in all, the events of the past week underlined the interconnectedness of traditional finance and the crypto industry. The collapse of Silvergate, Signature, and SVB, USDC’s departure from its stable, and the ensuing crypto rally brought attention to the challenges and opportunities of this emerging market. While the collapse of crypto-friendly banks raises concerns about liquidity and stability, the rise in cryptocurrency prices indicates increased investor interest and institutional adoption.
Leading crypto exchanges like Gate.io have seen an increase in trading volume and also reported positive sentiment and outlook. The stablecoin market, which was previously considered a safe haven, also began to be questioned, but eventually recovered. In fact, what is now considered a safe haven rather than banks has become crypto as a whole. As the crypto industry continues to evolve, it will be necessary to closely monitor the impact of traditional finance on this emerging market.
Disclaimer: This is a sponsored content and press release, and what is written here does not reflect the views of the Kriptokoin.com team. The high risk of loss should be taken into account in leveraged transactions and crypto money investments, and extensive research should be done before investing in any platform. Contact us to be instantly informed about the last minute developments. twitter‘in, Facebookin and InstagramFollow and Telegram And YouTube join our channel!
Risk Disclosure: The articles and articles on Kriptokoin.com do not constitute investment advice. Bitcoin and cryptocurrencies are high-risk assets, and you should do your due diligence and do your own research before investing in these currencies. You can lose some or all of your money by investing in Bitcoin and cryptocurrencies. Remember that your transfers and transactions are at your own risk and any losses that may occur are your responsibility. Cryptokoin.com does not recommend buying or selling any cryptocurrencies or digital assets, nor is Kriptokoin.com an investment advisor. For this reason, Kriptokoin.com and the authors of the articles on the site cannot be held responsible for your investment decisions. Readers should do their own research before taking any action regarding the company, assets or services in this article.
Disclaimer: Advertisements on Kriptokoin.com are carried out through third-party advertising channels. In addition, Kriptokoin.com also includes sponsored articles and press releases on its site. For this reason, advertising links directed from Kriptokoin.com are on the site completely independent of Kriptokoin.com’s approval, and visits and pop-ups directed by advertising links are the responsibility of the user. The advertisements on Kriptokoin.com and the pages directed by the links in the sponsored articles do not bind Kriptokoin.com in any way.
Warning: Citing the news content of Kriptokoin.com and quoting by giving a link is subject to the permission of Kriptokoin.com. No content on the site can be copied, reproduced or published on any platform without permission. Legal action will be taken against those who use the code, design, text, graphics and all other content of Kriptokoin.com in violation of intellectual property law and relevant legislation.